Weaponisation of trade and slapping sanctions are the newest strong-arm tactics that super economies employ to punish countries that play foul

There is a new mise en scène on the global stage of conflict management — ‘Trade embargoes’. The increasing number of geopolitical tensions in recent years has seen a simple commercial activity such as trade being increasingly weaponised. While war is abhorrent, measured by any yardstick, but do trade embargoes serve out their intended purpose without any road kill?

Not only do trade embargoes cause disruptions in the supply chains — compounded by a rise in commodity prices — but also beget Governments to exert a greater degree of political influence on the supply chains. Supply Chain Resilience, rather than its efficiency and cost effectiveness, becomes the focus. Furthermore, ‘de-couplings’ do not happen overnight; these are complex and often lead to unintended consequences.

The US-China trade war, compounded by the COVID-19 pandemic, instigated countries to onshore and ‘near-shore’ the critical supply chains within politically allied partners. China came out with its “dual circulation” and the European Union with its “technological sovereignty” policy, all raising a fundamental question:  Is globalisation démodé?

Given that Russia’s military might belies its economic stature — its economy is one-eighth that of the United States, and also one-eighth of the European Union. A significant share of its exports, after China, ends up being supplied to Europe. Similarly, a large share of its imports, after China, is sourced from the European countries. While Europe buys about 70 per cent of Russia’s energy, even looked at from the other end, Russia supplies Europe 30 per cent of its natural gas requirement and is a major source of natural gas for both the Netherlands and Germany. Most of the East European countries depend on Russia for more than half their crude oil supplies — particularly Finland, Lithuania, Poland, Slovakia, Hungary and Bulgaria.

Then there is the semiconductor or chip — the building block of all electronics — which is considered the new oil. Although the United States itself has only a relatively small base of semiconductor fabrication, but American companies are leaders in the field of semiconductor design and chip patents — based on which the United States has put an embargo on any chip developed with American technology being sold to Russia.

Here again, Russia and Ukraine are major suppliers of neon and palladium, which are both vital components in chip manufacturing. Some analysts express the fear that Russia could leverage this to retaliate against the United States’ chip sanctions. Furthermore, Russia and Ukraine combined are significant players in the global grain markets. The war is battering the global food system, which has already been weakened by the COVID-19 pandemic, and now compounded by an energy shock. Ukraine’s exports of grain and oilseeds have mostly trickled down to zilch and the Russian exports are threatened. Russia and Ukraine supply 28 per cent of globally traded wheat, 29 per cent of barley, 15 per cent of maize and 75 per cent of globally traded sunflower oil. Global wheat prices have gone up 53 per cent since the start of the year.

The top 16 trade partners of Russia (in 2021) accounted for about 70 per cent of its exports and 75 per cent of its imports. Then there’s Ukraine. Just as it is geographically sandwiched between the East and West, it is also economically caught in the middle. Ukraine’s top 16 trading partners account for over 74 per cent of its imports and 64 per cent of its exports.

How the sanctions on trading with Russia will play out in the rest of the global economy elicits nuanced responses. Undoubtedly, the stance adopted by China will be pivotal — being not only the largest trade partner of both Russia and Ukraine by far, but a very significant trade partner of the United States and the European Union as well. Many experts opine that the ripple effects of these economic embargoes will be felt unevenly across the globe; countries like Mexico and Turkey, which have not imposed sanctions, could get an economic boost.

Countries such as these could benefit from the increased trade volume and act as a go-between for Russia and the rest of the global economy. India will need to finely balance its own stance if it is to escape any major disruption in its supply chains and continue on its path of manufacturing-led economic growth — having just crossed $1trillion in merchandise trade for the first time in this financial year. The World Trade Organisation’s thrice-rescheduled 12th ministerial conference is expected to take place in June 2022 — where the participating members are likely to address not only the matters pending with the world’s apex trade body, but also take up issues surrounding the war in Ukraine. Meanwhile, the crisis still looms and it will be a while before the full impact of the sanctions and the trade realignments becomes clearer.

(The author is a retired senior Government officer. The views expressed are personal.)